Last week we discussed principles to abide by when thinking of purchasing a home. First, a quick review of the key points:
- Establish a cash reserve for unforeseen expenses.
- Prioritize your savings.
- DO NOT exceed 28% of gross income AFTER SAVINGS on your mortgage payment.
This week, I want to discuss why renting may be the best course of action if you cannot stay true to these principles.
Follow The Welch Group every Tuesday morning on WBRC Fox 6 Money Tuesday segment for weekly insights.
Avoid the Down Payment Requirement
While there are exceptions to this rule, such as Veteran Affairs Loans and other government loan programs, most originated mortgages require a down payment. A typical down payment is 20% of the purchase price. However, some lenders require less than 20% if the loan is backed up with primary mortgage insurance (PMI). Still, this insurance adds to the overall cost of the mortgage and typically stays in place until the 20% equity threshold is met.
Deciding to rent a home does mean there is typically no large down payment requirement. However, most landlords may require a first month’s rent or security deposit. Even so, not having to produce that sizeable down payment will allow you to allocate this capital towards other more productive pursuits or life goals. These can include investment contributions (particularly a 401(k) with a company match), debt paydown (student loan debt, credit card debt, car loan debt, etc.), and other life events (wedding-related expenses, etc.).
Landlord Responsible for Upkeep
Homeownership expenses are more than just the monthly mortgage, property tax, and homeowner’s insurance. As an owner, you are responsible for ALL ongoing maintenance and any unforeseen major fixes(i.e., roof repair, plumbing issues, etc.). While homeowner’s insurance may partially offset some of these significant expenses, they will not fully cover them as insurance deductibles will need to be paid, and some items may be excluded in policy coverages. As a renter, the property owner is responsible for most maintenance and typically all major fixes, which can alleviate stress for those who do not want to be physically and monetarily responsible for the upkeep.
No Investment Risk / Freedom to Walk Away
With mortgage rates at their highest levels in over ten years and home prices on the rise in most areas, it makes sense to proceed with caution if looking to purchase a home. Before making this decision, be sure to evaluate the purchase from an investment perspective to ensure you are making the right decision for your budget and future goals. Currently, in this environment, home purchases are a risky investment. As an alternative, look to rent and avoid the short-term investment risk associated with this market. Remember, you cannot walk away from a bad investment, but you can walk away from a lease!
Still have questions about whether renting or buying is best for your financial situation? Consult with a financial professional to help you make the right decision for your budget.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC –(“Welch”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein and takes no responsibility.